BenQ refocuses on ODM business to survive

Shanghai, China -- BenQ Corp. pulled a U-turn last week, opting to spin off its branded business instead of its manufacturing division in an effort to find firm footing after a disastrous attempt to become a household name.

The decision to focus on Taiwan's popular ODM model returns BenQ to its roots, but it also signals the failure of a grand--some might say audacious--strategy to rival some of Asia's largest brand names, such as Sony Corp. and Samsung Electronics. BenQ had hoped to leverage cell phones as a flagship product, but an attempt to revitalize a loss-riddled handset unit bought from Sie- mens almost struck it a mortal blow.

Taiwan has few global brands, but BenQ chairman K.Y. Lee once said he believed staying in the rough-and-tumble contract-manufacturing business would eventually be a dead-end. Taiwan's original design manufacturers, such as Quanta Computer, are huge in scale, and electronics manufacturing services behemoths like Hon Hai Precision are stealing more of the business.

BenQ has already lost about $1 billion in an abortive attempt to become a handset heavyweight--a strategy that senior executives viewed as its best shot for global brand recognition. With that in mind, the slim profits of the ODM business might not look so bad.

"Our ODM experience is deep, and we still have competitive advantage over other contract makers," Lee said. Aside from the mobile-phone sector, "which now only takes up a small part of our business," all of BenQ's businesses "are healthy," he said.

BenQ earns 60 percent of its revenue from contact manufacturing and has worked for Dell Inc., Hewlett-Packard Co. and Motorola Inc. Because that side of the business is larger, Lee said it was a "straightforward decision" to keep contract manufacturing at BenQ's core. Separating the manufacturing and branded units will also help BenQ avoid a conflict of interest with its customers, a prickly issue that cost it Motorola as a client.

After the spin-off, the larger manufacturing entity will take a new name, Jia Da Corp., while the BenQ name will pass to the branded business. BenQ's spin-off must get shareholders' OK in June. If approved, the separation will happen in September.

The branded business will focus on handsets, LCD TVs, projectors and laptops. Jia Da Corp. will be a dedicated contract manufacturer for such products. It has expertise in displays, optoelectronic devices, mobile systems and PC-consumer "infotainment solutions."

Some analysts seemed puzzled over the move, saying the spin-off was unlikely to deliver BenQ from its troubles. "This new strategy doesn't seem to make a difference to the company, and it will still be hard for the firm to turn around," said CLSA analyst Vincent Chen.

But others are being patient, waiting to see if BenQ can pull off its resurrection and return to profitability by year's end. "What they're doing seems to be a move in the right direction. The question will be what can they do with the handset unit to get it up to the scale it needs to survive," said Dominic Grant, an analyst at Macquarie Research.

BenQ is struggling to recover from the failure of its German mobile unit, which sold phones under the BenQ-Siemens brand. In recent months, the company has performed financial triage on its books. It shed itself of noncore assets, such as a controlling stake in RFchip designer Airoha Technology Corp., and has also sold down its stake in AU Optronics, a key part of the BenQ Group. These efforts have netted about $363 million in cash.

Nevertheless, BenQ turned in its sixth consecutive quarterly loss last week. In the first quarter, it posted a net loss of $53 million--less than the $150 million loss in the same quarter last year, but slightly larger than analysts expected.

The success of the BenQ brand always seemed in doubt. Taiwan's expertise is designing and making goods for other companies, not stepping into the limelight itself. In the IT hardware industry, Acer Inc. is about the only local company that's made the tricky transition from anonymous ODM to global brand.

Yet even Acer stumbled on the way up, taking a beating in the U.S. before getting a feel for the market.

The decision to buy the loss-riddled handset division of Siemens stemmed from the hope that cellular phones would offer a centerpiece product line. If the company could build up consumer trust with the everyday device, then it believed people would be willing to buy its more expensive LCD TVs.

BenQ-Siemens failed miserably, and the messy aftermath has gained BenQ fame for its gaffes, not its goods. BenQ is now trying to rebuild handset sales in Asia. Lee has offered to resign, but that's been rejected. Instead, he will stay on to see if the company he helped create can be nursed back to life.
--Reuters contributed to this report.